Australian mobile phone "cap" plans: a horror movie

When Australians choose to buy a mobile phone, they usually buy the phone as part of two year contract with a network provider. The best way to get someone to pay too much for something is to offer very confusing and complicated pricing and bundling, and an Australian mobile phone purchase is one of the best examples of this I have seen anywhere. These deals combine financing of the handset with very complicated bundles of telecommunications, at ludicrously inflated "Zimbabwe dollar" prices which are then discounted to seem like good value.

Most Australian plans are so-called "Caps". These are fascinating deals. Fascinating like a horror movie. If you're in a hurry and about to buy a plan: there is now an alternative, where phone calls are ten times cheaper, data twenty times cheaper, and you only pay for what you use in a month (TPG), on the second best network in the country. This exposes caps for what they are: an incredible rip-off. TPG- has cap plans too, but since they have to be benchmarked against the "pay as you go" plan, they are much more reasonable.

A typical cap plan is advertised like this:

For $79 a month, you receive $800 worth of call value.

What a great deal!

The call value is ludicrously inflated by valuing calls at very high prices. In a typical plan, calls are priced at $0.90 a minute. Data charges and text messages are likewise priced at very high amounts. If you use the $800 of credit purely on voice calls, you get 889 minutes of calls for your $79, which is really a cost of 9 cents a minute. In fact, if you hunt around, there is a "pay as you go plan" from a small player, just launched, which charges you $1 a month, and then 9 cents a minute for call (it's a TPG plan). So it seems $0.09 a minute is a reasonable value.

You might wonder what the difference is between a pay-as-you go plan and the cap: they both end up at $0.09 a call.

The first big difference is that the cap is a huge bag of minutes; whether you use it or not, you've paid for it. And there is no credit for unused minutes; the slate is wiped clean each month.If you were getting a discount for buying in bulk, that wouldn't be so bad, but you're not. Even at the best case, where month after month you use exactly your pre-purchased minutes, you pay the same per minute that I can get by only committing $1 a month (for which I get 50MB of data).

The even bigger difference is that if you exceed the limits of your cap, you discover that the ludicrously-inflated call rates are suddenly real, because for your 890th minute on the $79 cap, you will pay $0.90.On TPG's pay as you go, that minute only costs you another 9 cents. 890 minutes is a lot of calling in a month, but the cap value of $800 is consumed by everything at very high prices: SMS, voicemail, data. It's like using Zimbabwe dollars (until you run out of them). Why they are called caps is not clear: when you exceed what you bought, you are charged like a speeding driver. Kim Jong Il couldn't make it up.

So the cap is a contract where one partner has paid for a bundle of usage credits. There is no benefit for consuming less than the contracted amount, but a huge penalty if you do. If your only choice is between one cap and a higher cap, a risk averse person should choose the higher cap because exceeding your usage results in extremely expensive charges. For example, the cheaper alternative to the Vodafone $79 cap is the $49 cap, which provides an incredible $450 of call value (at $0.90 a minute, which is 500 minutes). If you spend 889 minutes on the phone, your additional charge will be $350. To avoid that risk, you can pay $30 a month more and rest easy. The higher cap appears to be insurance, but the insurance is protecting you from the company selling you the insurance. I don't mean to pick on Vodafone; all the major networks are offering the same type of deal. These caps are a marketing piece of genius. Professionally, I'm in awe. Take a commodity (data), rebrand it as voice, data, social networking access and text messages, create a need (to avoid nasty billing surprises) and sell an incredibly overpriced solution, locked in for two years, and seduce the customer with a "subsidised" handset with no money down.

One month of overshooting your cap can cost hundreds of dollars, so why not insure yourself against that risk by buying a plan way above your expected use? You've bought peace of mind, like a home insurance policy. The only way this makes sense is if you can only choose between "cap" plans. This probably explains why pre-pay plans are caps as well. The moment you can choose a sensible and fair pay-as-you-go option, the caps look horrible. Like Elizabeth in Pirates of Carribean, you see in the moonlight what monsters you have for shipmates.

This is an amazingly good deal for the network providers. On-top of everything else, they are convincing people to pay for capacity which they will never fully use, which means that capacity can be sold again and again. Imagine if the only way you could fly between Melbourne and Sydney was to pay two years in advance for four times as many flights as you expect to use. The airline company would oversell seats,I would imagine.

Of course, this is only possible if the choice between plans is a choice between caps. In Australia, most pre-pay plans are caps as well. How odd.

Note that the TPG $1 pay as you go plan: where calls are priced at $0.09 a minute, not $0.90 a minute, and where data is $0.027 per MB, not $0.50 a MB. Yes, TPG is 10 times cheaper for voice, 20 times cheaper for data, and you don't pay for what you don't use. Plus it's on a network with better coverage.